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Leigh Baldwin & Co.

112 Albany Street, Cazenovia, NY 13035 | Phone: (315) 655-2964 Toll Free: 1-800-659-8044

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The Week In Review

5/13-5/17/13

May 17, 2013
The S&P 500 ended this week with a bang, roaring to a new all-time high on the back of stronger-than-expected economic data, influential leadership, and an ongoing appreciation for the Fed's monetary policy support.
The bullish bias was evident in premarket action as the S&P futures pointed to a higher start without the benefit of any definitive news catalyst. Stocks indeed benefited from a blast of buying interest at the opening bell on this options expiration day that enabled the S&P 500 to reclaim all of yesterday's losses and then some in the first 30 minutes of trading.
Although things settled down, the market's bullish underpinnings were solidified by the stronger-than-expected University of Michigan Consumer Sentiment report for May and the Leading Indicators report for April. The former checked in at 83.7 versus 76.4 in the prior month and the Briefing.com consensus estimate of 78.5. In turn, the Index of Leading Indicators showed a 0.6% increase versus a 0.2% decline in March and the Briefing.com consensus estimate of 0.3%.
Today's economic news helped mitigate the disappointment of Thursday's generally underwhelming news for initial claims, housing starts, and the Philadelphia Fed Index.
After establishing its highs in the first 30 minutes, the S&P 500 traded sideways until about 2:00 p.m. ET, holding close to the 1658 level. There was never any concerted effort by sellers during that time. The market, however, broke out of its sideways stupor over the last two hours in a broad-based buying effort that was led by the cyclical sectors.
The breakout followed news that Minneapolis Fed President Kocherlakota said in a speech today that the FOMC has not lowered real interest rates sufficiently. Mr. Kocherlakota is not a voting FOMC member this year, and just as we were reluctant to assign credit for yesterday's afternoon selloff to the regurgitated views of San Francisco Fed President Williams (also a non voter) about the Fed possibly tapering its asset purchases soon, we are reluctant to suggest the afternoon rally was caused by Mr. Kocherlakota's dovish view. It didn't hurt matters, yet the breakout didn't occur until roughly 20 minutes after his remarks hit the wires.
Our sense of things is that the afternoon move was more of the same with short sellers capitulating in the face of the stock market's resilience to selling interest and bullish participants being emboldened further by the continued leadership of the sectors one would expect to see leading in a cyclical upturn: financials (+1.4%), energy (+1.6), industrials (+1.4%), materials (+1.2%), and technology (+1.2%).
There was little fixation on the disappointing earnings reports from Dell (DELL 13.40, -0.03), J.C. Penney (JCP 18.01, -0.78), Autodesk (ADSK 37.11, -2.67), and Nordstrom (JWN 60.67, -0.46) as the broader trend of capitalizing on the Fed's liquidity support continued to drown out any disappointing developments.
The upside bias in the stock market once again took the wind out of the Treasury market's sails (10-yr note -20/32 at 1.95%) and weighed further on other so-called safety trades like gold (1356.60, -30.30).
With today's gain, the S&P increased 2.0% for the week; and it is now up 4.3% for the month, clearly decoupling itself from the "sell in May and go away" couplet.

May 16, 2013
The major averages settled in the red as the S&P 500 lost 0.5% while Nasdaq shed 0.2%.
The three indices hovered near their respective flat lines for the majority of the day before sellers emerged in the afternoon, and drove equities to their first loss in five days.
Nine of ten sectors ended in the red with technology as the lone standout. The sector gained 0.7% and contributed to the outperformance of the Nasdaq. Better-than-expected earnings from Cisco Systems (CSCO 23.89, +2.68), and the relative strength of large components like Apple (AAPL 434.58, +5.73) and IBM (IBM 204.69, +1.37) provided support for the sector.
While technology boosted the Nasdaq, the index was held back by the weakness of biotechnology. The iShares Nasdaq Biotechnology ETF (IBB 180.23, -3.79) fell 2.1% to trim its week-to-date gain to 0.1%. Although the biotech ETF has been the subject of some profit taking following its recent run, it remains higher by 4.6% in May.
biotechnology also weighed on the health care space, which was the weakest defensively-oriented sector, shedding 1.0%.
Overall, the discretionary sector was the biggest laggard as homebuilders and retailers underperformed. The SPDR S&P Homebuilders ETF (XHB 31.90, -0.54) lost 1.7% after the April housing starts report missed expectations. Meanwhile, the SPDR S&P Retail ETF (XRT 76.93, -0.84) slid 1.1% after Dow component Wal-Mart (WMT 78.50, -1.36) missed on earnings and revenue.
Also of note, the Dow Jones Transportation Average appeared strong in early action, but the bellwether complex declined through the afternoon before ending with a loss of 0.8%.
In the Treasury market, the 10-yr note received notable interest after today's disappointing economic data. As a result, the 10-yr yield declined six basis points to 1.877%.
The CBOE Volatility Index (VIX 13.25, +0.44) ended higher by 3.5%, suggesting downside protection received some interest.
Today's economic data was plentiful, and largely disappointing.
Housing starts fell 16.5% in April to 853,000 from a downwardly revised 1.021 million (from 1.036 million) in March. That was the smallest number of starts since November 2012. The Briefing.com consensus expected housing starts to fall to 970,000.
Multifamily construction, which tends to be highly volatile, fell to 243,000 in April from 398,000 in March. The drop is likely a reversion to the mean as multifamily construction has been running much hotter than its 12-month average.
The initial claims level jumped to 360,000, the highest level since February (excluding the volatility from the Easter holiday problems), for the week ending May 11 from an upwardly revised 328,000 (from 323,000) for the week ending May 4. The Briefing.com consensus expected the initial claims level to increase to 330,000.
The CPI fell 0.4% in April after declining 0.2% in March. The Briefing.com consensus expected consumer prices to fall 0.2%. Excluding food and energy, core CPI increased 0.1% for a second consecutive month. The consensus expected these prices to increase 0.2%.
The Philadelphia Fed's Business Outlook showed that manufacturing activity in the Philadelphia region contracted in May. The index fell to -5.2 from 1.3 in April. The Briefing.com consensus expected the Philly Fed Index to increase to 2.5.
Tomorrow, the preliminary May Michigan Consumer Sentiment Survey and April leading indicators will be reported at 9:55 ET and 10:00 ET, respectively.

May 15, 2013
The major averages settled with modest gains despite an afternoon stumble. The S&P 500 climbed 0.5% to bring its week-to-date gain to 1.5%.
Equities opened in the red as domestic and foreign economic data reminded investors of a cloudy growth picture. However, the opening strength of defensive sectors quickly overshadowed the early losses, and helped the broader market erase its early weakness.
Consumer staples and utilities outperformed throughout the session as the two sectors settled with respective gains of 1.0% and 0.8%.
The health care space lagged behind its defensively-geared counterparts as biotechnology became the subject of some profit taking following its recent run. The iShares Nasdaq Biotechnology ETF (IBB 184.02, -2.16) settled lower by 1.2%, but is still up 6.7% in May, and higher by 2.1% this week alone.
The underperformance of biotech weighed on the Nasdaq, which trailed the other two major indices throughout the session. In addition, Apple's (AAPL 428.85, -15.01) largest decline in nearly a month also exerted pressure on the Nasdaq as well as the technology sector, which ended with a slim gain. Another large sector component Google (GOOG 915.89, +28.79) rose 3.3% after the company unveiled a music streaming service at its I/O developers conference in San Francisco.
Most other cyclical groups were somewhat shaky as the energy space spent the day in negative territory. Crude oil was down as much as 2.0% before recovering those losses to end little changed at $94.30.
Elsewhere, industrials were pressured by cautious third-quarter revenue guidance from Deere (DE 89.64, -4.13). The machinery manufacturer lost 4.4%, but the relative strength of transportation-related names kept the industrial sector from falling too far behind the broader market.
The Dow Jones Transportation Average rose 0.8% to notch another record high as airlines soared. Southwest Air Lines (LUV 14.34, +0.36) gained 2.6% after hiking its quarterly dividend to $0.04 from $0.01 and announcing a $500 million increase to its share repurchase authorization.
The financial sector was the only growth-sensitive group which remained strong throughout the day. Major banks registered gains across the board as the sector added 0.9%. The group has been the best performer this week, climbing 3.0%.
This morning's economic data was plentiful as April producer prices declined 0.7%, which was cooler than the downtick of 0.5% forecast by the Briefing.com consensus. Meanwhile, core producer prices rose 0.1%, in-line with the Briefing.com consensus.
Industrial production fell 0.5% in April after increasing a downwardly revised 0.3% (from 0.4%) in March. The Briefing.com consensus expected industrial production to decline 0.2%.
Manufacturing production declined 0.4% in April after declining 0.3% in March. The drop was in-line with the weakness reported in nearly all of the regional manufacturing surveys. Durable and nondurable goods manufacturing fell 0.6% and 0.1%, respectively.
The rate of capacity utilization fell to 77.8% from a downwardly revised 78.3% (from 78.5%) in March. That is the lowest level of capacity utilization since January. Manufacturing capacity utilization dropped to 75.9%, which is the first time since November 2012 that the utilization rate slipped below 76%.
Separately, the Empire Manufacturing Survey for May registered a reading of -1.43, which was down from the prior month's reading of 3.1. Economists polled by Briefing.com had expected that the survey would rise to 3.5.
The May NAHB Housing Market Index was unchanged at 44. Today's report was in line with the Briefing.com consensus.
Another busy day of economic data reporting is setting up for tomorrow. Weekly initial claims, April CPI, core CPI, housing starts, and building permits are all scheduled for an 8:30 ET release. This will be topped off by the May Philadelphia Fed Survey, which is set
to cross the wires at 10:00 ET.

May 14, 2013
Equities ended the day little changed as the Dow Jones Industrial Average shed 0.2% while the Nasdaq added 0.1%. The S&P 500, for its part, ended flat.
Stocks registered losses at the open as Thursday's afternoon rumor turned into a Friday evening headline. According to the Wall Street Journal, the Federal Reserve has begun to map out a plan to slow the pace of its asset purchase program.
However, the article did not provide any additional insight with regards to the timing of actual policy modification. Past comments from the Fed have indicated any changes would likely have to be preceded by a notable improvement in the labor market.
The S&P 500 notched its lows 90 minutes into the session before climbing back to its flat line. The index was able to make a brief appearance in the black, but with declining issues outpacing advancers, the S&P surrendered to the underlying currents.
The Nasdaq outperformed the broader market thanks to the relative strength of biotechnology. The iShares Nasdaq Biotechnology ETF (IBB 183.04, +3.02) continued its recent outperformance by adding 1.7%. Notably, the ETF is higher by 4.9% since last Thursday, and up 33.1% year-to-date.
Biotech names provided support for the health care space, which led throughout the day. Meanwhile, other defensively-oriented groups were mixed. The staples sector registered a slim gain while utilities and telecom ended with modest losses.
The utilities sector shed 0.6% to extend its recent weakness. The high-yielding space is down 4.7% in May.
While defensive groups saw mixed results, cyclical sectors ended generally lower with financials being the exception.
The SPDR Financial Select Sector ETF (XLF 19.31, +0.06) added 0.3% amid the outperformance from most majors. However, the relative strength of U.S. financials was not matched by their European counterparts. Banco Santander (SAN 7.05, -0.15) and Deutsche Bank (DB 46.98, -0.52) settled with respective losses of 2.1% and 1.1%.
Elsewhere, industrial shares lagged throughout the day as transportation-related names displayed weakness. Airlines and truckers pressured the Dow Jones Transportation Average, which lost 0.5%.
In the bond market, Treasuries ended with modest losses as the 10-yr yield rose two basis points to 1.925%.
Looking back at today's economic data, business inventories growth was flat for a second consecutive month in March. The Briefing.com consensus expected business inventories to increase 0.3%.
Inventory growth from manufacturers (0.0%) and merchant wholesalers (0.4%) was known prior to the release. The only new information was that retailer inventories declined 0.5% in March after increasing 0.2% in February.
Retail sales increased 0.1% in April after declining 0.5% in March. The Briefing.com consensus expected retail sales to decline 0.3%. The April employment report showed a 0.3% decline in aggregate wages. The increase in sales was a result of consumers reducing their savings rate. That may work in the short-run, but consumers are expected eventually to increase their savings rate back to 2012 levels. Unless income growth accelerates, retail sales growth will likely decelerate and possibly contract in the long-run.
Tomorrow, export prices ex-agriculture and import prices ex-oil will both be reported at 8:30 ET.

May 13, 2013
Equities ended the day little changed as the Dow Jones Industrial Average shed 0.2% while the Nasdaq added 0.1%. The S&P 500, for its part, ended flat.

Stocks registered losses at the open as Thursday's afternoon rumor turned into a Friday evening headline. According to the Wall Street Journal, the Federal Reserve has begun to map out a plan to slow the pace of its asset purchase program.

However, the article did not provide any additional insight with regards to the timing of actual policy modification. Past comments from the Fed have indicated any changes would likely have to be preceded by a notable improvement in the labor market.

The S&P 500 notched its lows 90 minutes into the session before climbing back to its flat line. The index was able to make a brief appearance in the black, but with declining issues outpacing advancers, the S&P surrendered to the underlying currents.

The Nasdaq outperformed the broader market thanks to the relative strength of biotechnology. The iShares Nasdaq Biotechnology ETF (IBB 183.04, +3.02) continued its recent outperformance by adding 1.7%. Notably, the ETF is higher by 4.9% since last Thursday, and up 33.1% year-to-date.

Biotech names provided support for the health care space, which led throughout the day. Meanwhile, other defensively-oriented groups were mixed. The staples sector registered a slim gain while utilities and telecom ended with modest losses.

The utilities sector shed 0.6% to extend its recent weakness. The high-yielding space is down 4.7% in May.

While defensive groups saw mixed results, cyclical sectors ended generally lower with financials being the exception.

The SPDR Financial Select Sector ETF (XLF 19.31, +0.06) added 0.3% amid the outperformance from most majors. However, the relative strength of U.S. financials was not matched by their European counterparts. Banco Santander (SAN 7.05, -0.15) and Deutsche Bank (DB 46.98, -0.52) settled with respective losses of 2.1% and 1.1%.

Elsewhere, industrial shares lagged throughout the day as transportation-related names displayed weakness. Airlines and truckers pressured the Dow Jones Transportation Average, which lost 0.5%.

In the bond market, Treasuries ended with modest losses as the 10-yr yield rose two basis points to 1.925%.

Looking back at today's economic data, business inventories growth was flat for a second consecutive month in March. The Briefing.com consensus expected business inventories to increase 0.3%.

Inventory growth from manufacturers (0.0%) and merchant wholesalers (0.4%) was known prior to the release. The only new information was that retailer inventories declined 0.5% in March after increasing 0.2% in February.

Retail sales increased 0.1% in April after declining 0.5% in March. The Briefing.com consensus expected retail sales to decline 0.3%. The April employment report showed a 0.3% decline in aggregate wages. The increase in sales was a result of consumers reducing their savings rate. That may work in the short-run, but consumers are expected eventually to increase their savings rate back to 2012 levels. Unless income growth accelerates, retail sales growth will likely decelerate and possibly contract in the long-run.

Tomorrow, export prices ex-agriculture and import prices ex-oil will both be reported at 8:30 ET.